Citi, JPMorgan May Face Highest Basel Capital Surcharges

Citigroup Inc., JPMorgan Chase & Co., BNP Paribas SA, Royal Bank of Scotland Group Plc, and HSBC Holdings Plc may face top capital surcharges of 2.5 percentage points, according to a provisional list prepared by global regulators and obtained by Bloomberg News.

The list was drawn up as part of plans by the Group of 20 nations to force banks whose failure could damage the global economy to boost their reserves by 1 to 2.5 percentage points above minimum levels agreed on by international regulators. Bank of America Corp., Barclays Plc and Germany’s biggest bank Deutsche Bank AG may face surcharges of 2 percentage points, according to the list.

“You’re saying by virtue of being a bigger bank, you’re going to have to pay for that,” Joseph R. Mason, a finance professor at Louisiana State University in Baton Rouge, said in a telephone interview. “You’re creating an incentive for big banks to hide even more risk to get the surcharge reduced.”

A simplified version of the 29-bank list, which didn’t set out the surcharges individual banks would face, was published by the Financial Stability Board on Nov. 4. Lenders including HSBC and BNP Paribas have warned regulators the plans could cause them to cut lending and support to international trade. Plans for the surcharges were published after approval by G-20 leaders in France last week.

Provisional List

Regulators have emphasized the current list is provisional and will be repeatedly revised before the surcharges are applied starting in 2016. The list is based on data from the end of 2009 that “may not be sufficiently reliable or complete,” the Basel Committee on Banking Supervision, which drafted the measures, has said. Lenders have already been asked to submit end-of-2010 data for an updated list to be published next year.

Some of the surcharges “will be less meaningful as they will be trumped by local regulation in Europe, especially in countries with supersized banking systems,” Morgan Stanley analysts said in a note published Nov. 6.

The extra requirements are calculated against banks’ interconnectedness, size, complexity, global reach, and the ability of other firms to take over their functions if they fail.

Deutsche Bank Ranking

Under the surcharge plans, national regulators have the power to seek to move banks under their jurisdiction up or down the list if they can show that the Basel committee’s calculations should be overridden.

Placing Deutsche Bank outside the top tier is likely to “reflect the supervisory judgment” of German authorities, Richard Reid, research director for the International Centre for Financial Regulation, said in an e-mail.

“Of course there’s always the suspicion that there’s a political element to the process of drawing up the lists,” Reid said. “Rankings are likely to change as more up to date information is incorporated and supervisors amend their recommendations in the light of changing economic and financial conditions.”

Goldman Sachs Group Inc., Morgan Stanley, Bank of New York Mellon Corp., Groupe Credit Agricole, Credit Suisse Group AG and UBS AG may face surcharges of 1.5 percentage points, according to the list.

Lowest Tier

The remaining 15 banks on the list, including Wells Fargo & Co., Societe Generale SA, and Dexia SA, the French-Belgian lender being broken up after losing access to short-term funding, may all face surcharges of 1 percentage point.

The surcharges will be applied on top of an overhaul of bank-capital requirements that international regulators agreed on last year. Those changes, known as Basel III, will more than triple the core reserves that lenders must hold. The additional buffers mean lenders may face core capital requirements of as much as 9.5 percent of assets, weighted on risk.

‘Question Mark’

“While banks technically won’t need to be fully compliant” with the rules until 2019, their “ability to deploy capital in the near term will likely remain somewhat of a question mark until local regulators provide clarity on expectations,” analysts from Goldman Sachs said in a note published Nov. 4.

Some banks in the European Union already face requirements to hold 9 percent in core reserves, after sovereign-debt writedowns, under plans adopted by EU regulators in response to the Greek financial crisis. Banks will need to raise 106 billion euros ($146.1 billion) in fresh capital to meet the rules, the European Banking Authority estimated.

The definition of what banks can count as capital to meet the Basel surcharges is stricter than that used by the EU, which allows lenders to use some contingent convertible instruments to meet the 9 percent threshold.

Citigroup Inc., JPMorgan Chase Co., BNP Paribas SA, Royal Bank of Scotland Group Plc, and HSBC Holdings Plc may face top capital surcharges of 2.5 percentage points, according to a provisional list prepared by global regulators and obtained by Bloomberg News.
The list...